Written on: March 6, 2023
By Steve Abbate, Managing Director of Cetane Associates
Originally published in Fuel Oil News
On occasion we are asked if it is more cost effective to gain an account through sales and marketing or through an acquisition. Over the years we have completed the analysis several times. To do the analysis yourself, you need to drill down into your operating expenses and calculate all the expenses associated with sales and marketing. Some of the items on your income statement are easier to identify than others. Expenses such as advertising, salesperson wages, auto allowance, referral fees, and any type of direct customer solicitation are easier to quantify.
Other expenses need to be researched or estimated. When you calculate salesperson wages, don’t forget to add a benefit load to include payroll tax, health insurance, workers’ compensation and other payroll benefits. These items are sometimes called “benefit load.” We use between 28%-35% of wages depending on the benefits package. Other items may be the cost of a promotional program such as a first fill discount or a free or discounted service agreement. Website costs may need to be estimated. While the cost of a Search Engine Optimization (SEO) program may be 100% attributed to sales and marketing, the cost of the website would likely have little weighting to sales and marketing as it is a necessary business expense.
Having done the analysis several times, we have continually found that marketing for a new customer has always been substantially lower cost than acquiring a new customer. So why do so many companies get acquired? The answer is that a great marketing program can typically grow a company’s customer list by 1%-4% per year. This is referred to as organic growth. If you are in that range then you are in the top percentile in the delivered fuels industry. This is especially true if you are in a market where conversions to other heating sources, such as heat pumps, are prevalent. Most companies have attrition and strive to stay even on customer count from year to year.
Acquiring customers typically costs two-to-three times what it costs to grow organically. No matter how good your marketing programs are, or how low you price the product, many customers will not switch. Customers are loyal to their fuel suppliers and we have seen customers who have run out of product in the winter more than once and they still stay with their current suppliers. We have seen margins in excess of $1.00 a gallon over competitors and they still stay with their current suppliers.
So how can that be? You let them run out of fuel and you still keep them as a customer most of the time? You charge more than your competitors and they stay customers? There are many answers to that question. Mostly, it is the relationship you have built over the years and your value proposition. Your company may have a good reputation in the community and customers may be familiar with the drivers who they know by name. If you are a propane marketer, it may be that you control their tank as you own it. Having an HVAC component to your business also helps keep customers. If you sold the customer a heating or cooling appliance, studies have found that they are less likely to change companies.
The other reason acquisitions are so prevalent is that they still offer a buyer a great return on investment. This is especially true if the buyer borrows funds at an interest rate lower than the return on investment. In that situation, the return on the buyer’s investment before loans, or the return on the equity investment, is even higher. The delivered fuels industry has always proven to be a great, recession resistant, pandemic resistant industry and it offers a safe investment at over-market returns.
So, if you can market to gain customers, go for it as it is the most cost-effective method to grow. If you decide to complete an acquisition to grow your business, it is also a safe, high-yielding method. Better yet, do both!